01 Aug Politically uncertain times
What does political uncertainty mean for your personal finances?
These are politically uncertain times. The airwaves and internet bombard us with an endless procession of unpredictable politicians, lost down the rabbit hole that is Brexit and focussed more on partisan party lines and political careers than us. The media repeatedly tells us businesses lack confidence in an environment lacking in clarity.
So, what do we do? Hold off financial decisions, delay that house move, and sit it out – in essence hide the cash under the proverbial mattress and do nothing? “Overall, 63% of Remain voters believe that their personal finances will get worse after the UK leaves the EU, compared with 11% of those who voted Leave. Just 1% of Remain voters think their finances will get better, against 17% of Leave voters. Meanwhile, 23% of Remain voters think their finances will stay much the same, compared with 59% of Leave voters.[Source]”
Well, actually leaving all your cash under the mattress might not be such a good idea for the individual or business. Merryn Somerset Webb in The Financial Times writes that actually, whilst is seems like a big deal in Westminster, the economic effect of Brexit may be less significant. “ Look at UK GDP growth rates — 1.5% a year isn’t bad. It might have been better without the investment-delaying uncertainty surrounding Brexit. But against the backdrop of a global economic slowdown, it’s hard to tell — particularly as the rest of the EU is doing little better.” Anyway, sitting it out isn’t an option for many of us… life is busy and continues on regardless of what happens in Westminster and Brussels; some of us have expanding families (both young and old), some of us need to relocate, some of us are approaching retirement, or thinking of upsizing or downsizing, In essence, we can’t just wait it out. In fact, it may not be as bad as some think.
However, whatever happens with Brexit, should there be a general election and a Labour government elected, there are very likely to be some changes that will affect personal finances. Jeremy Corbyn has pledged that private school fees will no longer be exempt from VAT so will be subject to a 20% increase. According to the Independent Schools Council Census 2019, average school fees nationally are £14,289 per annum, so with VAT added, families will need to budget for an increase of around £2,858 per child per year, and bear in mind that fees in the South East are generally higher than other parts of the UK.
Stamp Duty Land Tax
Stamp Duty Land Tax (SDLT) has existed in some form for more than 400 years. Undergoing significant restructure in 2014, SDLT is now only payable on the portion of value of the bracket it falls into, e.g. the first £125,000 of a property purchase is completely free, the next £125,000 is payment at 2.5% (or £2,500) etc. Higher Band rates, introduced in 2016 for buy-to-let and second homes purchases, incur an additional 3% on top of existing bands. To help first time buyers, there is relief (i.e. No tax due) up to £300,000 and 5% on the portion from £300,001 to £500,000.
|Property or lease premium or transfer value||SDLT rate|
|Up to £125,000||Zero|
|The next £125,000 (the portion from £125,001 to £250,000)||2%|
|The next £675,000 (the portion from £250,001 to £925,000)||5%|
|The next £575,000 (the portion from £925,001 to £1.5 million)||10%|
|The remaining amount (the portion above £1.5 million)||12%|
SDLT revenue, initially a reliable source of government revenue (increasing 215% to £9.3bn from 2008-9 to 2017-18), is now decreasing. In October 2018, the Office for Budget Responsibility downgraded it’s forecast for 2018-19 and forecast that £4bn less would be collected by 2022. This is partly attributed to the reduction in stamp duty for first-time buyers, many taken out of SDLT altogether. However, it has contributed to cooling the buy-to-let market, and reluctance for those particularly in London & SE, buying a relatively modest three or four bed terrace, costing around £1m who are looking at stamp duty bill of £43,750. An LSE report in 2017 argues that the current system is compounding the dysfunction in the property market, mostly affecting buyers of family homes and would be downsizers.[Source] So, whilst no political party is overtly mentioning reform of SDLT, the tax take seems to be dropping and it’s a sure fire vote winner.
However, the government has successfully encouraged the rise of first time buyers into the market, mainly through Help to Buy and reduced SDLT.Bringing a new generation of money and owner occupiers into the market is an excellent way to maintain vested interest in the status quo of rising property prices.
The housing market seems in a peculiar state, with transactions numbers diminishing and the rate of house price growth slowing. Yet beyond a first glance, the long term outlook looks cyclically familiar. Banks are fighting for business, expect them to lobby the government for a more preferential lending environment. Also watch out for less rigorous lending criteria, for example Santander recently increased their limit for part interest only mortgages from 75% loan to value to 85%. We expect more of this in the years ahead.
With a significant change of government spending could come increased inflation, what effect would this have on house prices? This itself could be absolutely momentous. Whilst there is general unconstrained panic in London property circles about the effect of a Jeremy Corbyn government and taxation, remember most taxation is paid on the crystallisation of an asset. Jeremy Corbyn was 70 at the end of May.
The pensions outlook has improved hugely since 2012. With the dawn of commission free investment products, increased adviser professional standards, auto-enrolment (semi mandatory pension contributions for all employees), the introduction of flexible access to pension schemes at retirement and rising stock markets. Yet those who earn more than £210,000 are hamstrung by the tapered annual allowance. Essentially a nonsensical rule that prohibits those that can afford to regularly make £40,000 annual pension contributions from doing so. Why this restriction was created remains undocumented, but the suspicion must be that it was part of an agenda to reduce higher rate tax relief on pensions, a long targeted area of perceived over generosity by HM Treasury. There is no outlook currently from any politician to review this, nor does resolving the pension planning woes of additional rate tax payers seem politically advantageous. However higher and additional rate tax relief is always under threat.
Nothing is forever
US commentators state that the US stock market has been experiencing a bull market since the low point of March 2009. Currently this is the longest bull market since the end of World War II. Here in the UK, some hold a similar view and feel it may continue onwards yet.[Source] However, it’s also been a slow one. Notwithstanding that – markets do not rise forever without corrections along the way. Whilst predicting timing of such things is impossible, for experienced investors, being surprised when they happen would be…surprising. Such matters are arguably beyond the control of our politicians, yet the incumbent will usually bear the blame.
Whilst political uncertainty is acute currently, hopefully, nothing is forever. Making good long term strategic decisions for yourself and your family remains important. As ever the content of this short precis will be interpreted and acted upon differently by our clients and we’ll enjoy engaging with you individually to refine your strategy.
Contact Just Us Financial Solutions
For impartial advice from experienced Financial Advisors contact the office on 020 7562 5767 or send a message via the Contact Form.
THE VALUE OF PENSIONS AND INVESTMENTS CAN FALL AS WELL AS RISE. YOU MAY GET BACK LESS THAN YOU INVESTED.